BIR Ruling [DA-395-98]

August 28, 1998 BIR RULING [DA-395-98] SGV & Co. 3rd Floor Insular Life Building Cor. Gorordo and Gen. Maxilom Avenues Cebu City Attention: Atty . Lauris L . dela Pea Tax Division Gentlemen : This refers to your letter dated February 17, 1998 requesting for and on behalf of your client, T & H Furnishing Industries, Inc. (THF), our opinion that the remittances of technical service fees to Tsuneishi Forestry Construction Co., Ltd. (TFC) of Japan pursuant to a Service Agreement, is subject to the 25% withholding tax under the RP-Japan Tax Treaty and the compensation paid by TFC to its personnel as technical advisors to Filipino workers on the technology of ship accommodation making shall be exempt from Philippine income tax pursuant to the said treaty. cdt It is represented that THF is a domestic corporation organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office at Balamban, Cebu; that TFC is a non-resident foreign corporation organized and existing under the laws of Japan with principal office at 1083 Tsuneishi, Numakuma-chu, Numakuma-gun, Hiroshima Prefecture, Japan; that on January 13, 1998, THF entered into a Service Agreement with TFC for the latter to render to the former technical services to train Filipino workers on the technology of ship accommodation making; that the total service fee is JY11,672,766.00 per ship; that the Japanese technical advisors shall render their services for a period of 50 days for the technical advice with respect to welding of steel blocks, 50 days with respect to iron works on erection, 150 days with respect to carpentry and another 130 days with respect to electrical works; that each technical service shall separately be performed by different persons each considered as an expert in his category; and that each Japanese technical advisor shall not receive any salary or any form of compensation from THF, the same being paid exclusively in Japan by TFC. In reply, please be informed that Article 12(3) and (4) of the RP-Japan Tax Treaty provides, viz: "ARTICLE 12 "(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: "(a) . . . "(b) 25 per cent of the gross amount of the royalties in all other cases "(3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. "(4) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." This Office has already ruled that fees being paid by a domestic corporation duly registered with the Board of Investments (BOI) on a preferred pioneer status in favor of a foreign corporation not engaged in trade or business in the Philippines, in consideration of the technical assistance and other benefits are in the nature of royalties subject to tax at the rate of 10% applying the above provisions of Article 12(3) and (4) of the RP-Japan Tax Treaty. In other words, the fee being paid by the domestic corporation should likewise be considered embraced within the meaning of the term "royalty" since the dispatch of the foreign corporation's technical personnel to provide technical assistance to the domestic corporation is transfer of know-how subject of the Manufacturing, Patents and Technical Assistance Agreement between the above corporations. (BIR Ruling No. 026-94 dated January 21, 1994) Moreover, Article 15 of the RP-Japan Tax Treaty provides, viz: "ARTICLE 15 "(1) Subject to the provisions of Articles 16, 18, 19, 20, and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. "(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned contracting state if: "(a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and "(b) the remuneration is paid by, or on behalf of an employer who is not a resident of that other Contracting State, and "(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State." Such being the case, the remittances by THF of technical service fees to TFC of Japan pursuant to a Service Agreement is subject to royalty tax rate of 25% under the RP-Japan Tax Treaty. Inasmuch as each of the Japanese technical advisors shall stay in the Philippines for a period not exceeding in the aggregate 183 days in a calendar year as different technical advisors shall be rendering the services in each different stage and that their salary shall be paid exclusively by TFC in Japan, the said salary shall not be subject to Philippine income tax and consequently to withholding tax on compensation. (BIR Ruling No 320-88 dated July 13, 1988) cdtech This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)